NEW YORK, NY — (Marketwire) — 02/21/12 — Fraud has devastated for-profit corporations
and investors. Now the risk of fraud in nonprofit organizations is surging
as well.
A culture of trust, charismatic executives and limited resources for
oversight combine to create ideal conditions for fund skimming, expense
padding and other scams, says an experienced fraud examiner.
“A typical nonprofit fraud involves a charismatic executive who takes
advantage of trusting relationships with boards and donors, and has
authoritarian control over staff, says , a Certified
Fraud Examiner and director in the Litigation and Corporate Financial
Advisory Services Group at New York accounting firm
“The director or president diverts funds for personal use — but staff
members are afraid to ask questions,” Ms. Sawhney says. “But that means
that funds aren-t being used for the organization-s mission. And when the
fraud is detected, donor support takes a nosedive and the organization is
damaged even more.”
Ms. Sawhney is available for interviews and can author a bylined article
that discusses:
“The economic downturn
drives fraud in all sectors,” Ms. Sawhney explains. “For nonprofit
organizations, hard times mean reduced staff, and that in turn means that
there are fewer -eyes on the street,- to detect fraud. Staff members may
be more fearful of losing their jobs and are thus less likely to question
an executive-s actions.”
“Nonprofit culture is extremely trusting — there are often close,
interlocking personal relationships among executives, board members and
donors,” Ms. Sawhney says. “That makes it harder for board members to
question an executive or for donors to question how their funds are used.
Board members are usually unpaid volunteers with little or no financial
expertise. Boards frequently experience a high turnover of members which
makes continuity of more oversight challenging.
who use
their relationships with donors to maintain their authority — who would
question a small expense by someone who brings in $10 million? And they
enhance their positions by helping donor friends get board seats. Then
they wield their authority over small, low-paid staffs that are unlikely to
cross them. The director is king of the hill — and a fraudster in that
position can buy loyalty and silence.
“The risk is particularly high at small and mid-sized organizations, where
presidents and directors are often the sole high-powered executive, and
where there often aren-t separate CFOs or controllers to provide
oversight.”
“Nonprofits are highly susceptible to the effect of negative publicity and
as such are often reluctant to report fraud.”
“As a rule, nonprofit
fraudsters aren-t diverting donor checks or otherwise appropriating money
on the way in,” Ms. Sawhney says. “They-re appropriating it on the way
out. They pad their expenses, or treat themselves to five-star hotels,
restaurants and car services, or introduce bookkeeping errors on expense
reports. In one case, an individual ran $400 in expenses but put in an
expense report for $1,400. The receipts didn-t match but there was no one
to review them. Also, many small to midsize nonprofits don-t have policies
in place that set limits on personal expenses. This makes it hard to
maintain discipline or say what-s excessive.”
“Tracking down
fraud can be difficult, especially when budgets are reduced,” Ms. Sawhney
says. “But there are still steps that boards can and should take to reduce
the incidence of fraud, and detect it more effectively when it
occurs.
“The first step is to have in place, written
out and clearly defined, which
“The second is to establish strict and reconciling expense reports with receipts.”
If fraud is suspected, forensic accountants can be hired to help detect
some of the “red flags.” Examples of “red flags” of nonprofit fraud
include an organization that allows almost all accounting matters to be
handled by a select few individuals without a system of checks and
balances. As an example, a check signer at a nonprofit could use their
check signing authority to write personal checks to themselves without
having the appropriate checks and balances. Another example of a “red
flag” at a nonprofit organization is related-party transactions.
Related-party transactions can sometimes create a perception of illegal
financial activity. As such it is significant to understand the reasoning
behind such relationships.
“The bottom line is this: The board needs to take steps to protect the
donor base and ensure that dollars are being used toward the mission, and
are being used efficiently and properly within the organization,” Ms.
Sawhney says. “By doing that, the board will also protect the reputation
of the organization. Particularly in times like these, donors want to know
that the director isn-t out spending the money on Rodeo Drive. They want
to know that it-s wise to continue supporting the organization. Improved
policies provide that reassurance — and thus protect the stream of
donations that the organization needs to survive.”
Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of
whom approximately 60 are partners and principals. The firm provides
businesses with a full range of auditing, accounting, tax, consulting,
bankruptcy and restructuring services as well as litigation and corporate
financial advisory services to domestic and international clients. The firm
also specializes in providing tax advisory and consulting for
high-net-worth individuals and their families, as well as a wide range of
services for international, real estate, media, entertainment, nonprofit,
professional and financial services, and energy clients. The firm has a
strong track record supporting emerging growth companies, entrepreneurs,
business owners and investors as they navigate the business life cycle.
The firm-s subsidiary, Tailored Technologies, LLC, provides information
technology consulting services. In addition, its membership in Morison
International, a leading international association for independent business
advisers, financial consulting and accounting firms, facilitates service
delivery to clients throughout the United States and around the world.
Marks Paneth & Shron LLP, whose origins date back to 1907, is the 30th
largest firm in the nation and the 13th largest in the New York area. In
addition, readers of the New York Law Journal rank MP&S as one of the
area-s top forensic accounting firms.
Its headquarters are in Manhattan. Additional offices are in Westchester,
Long Island and the Cayman Islands. For more information, please visit
.
Sareena Sawhney, MBA, CFE, CFFA is a Director in the Litigation and
Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. In
this role, she provides comprehensive litigation consulting services
encompassing the areas of complex fraud investigations, including white
collar crimes, forensic accounting, and anti-money-laundering.
Contact:
Katarina Wenk-Bodenmiller
Sommerfield Communications, Inc.
(212) 255-8386